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On My Mind: SA must act fast

15 July 2016 - 05:52
Tshokolo Petrus Nchocho

The Brexit vote, which left global markets poorer by more than US$2trillion, is expected to bring major shifts in the international development finance landscape. Access to development finance is crucial for growth, food security, poverty alleviation and mainstreaming of marginalised populations.

Dependence on foreign aid has waned in emerging markets and has been replaced by development finance, better able to cater for debt and equity financing and weather-related risks.

Historically, lenders have shown little appetite for the risks associated with agriculture. Lending for investments in agriculture, especially for small and emerging farmers, is scarce. According to the International Finance Corp, less than 1% of commercial lending is directed at agriculture.

The poor understanding of the agricultural sector’s risks and opportunities deprives it of funds to drive the economic prospects of the participants. In SA, there are approximately 450,000 small and emerging farmers. Access to credit empowers small farmers to participate more equally in the agriculture value chain. Getting these new actors into the mainstream will promote inclusive growth and will be critical to the success of transformation.

As a development finance institute (DFI), the Land Bank engages with multilateral agencies across the EU. With the EU now staring at a precarious economic and political future, development finance flows may diminish as the gap created by the UK’s contribution becomes apparent.

Brexit has forced challenges at best and new risks at worst.

In the wake of Brexit, we should all be concerned about more expensive development finance. With Britain out of the EU, capital supply could become more volatile as investors seek more secure investments.

And when funds do become available they will typically be expensive as investors require higher compensation for assuming higher risk.

In this context, the strategic imperative of domestic financial resources cannot be overstated. A functioning agricultural sector needs domestic funding to ease volatility, which in turn affects farmers’ ability to contribute to food security and their own financial well-being.

Against the backdrop of the turbulent global economy and slower growth at home, the Land Bank is implementing its new sustainability strategy and a diversified funding strategy. We expect it will ensure normality until financial markets stabilise, post-Brexit.

The Bank has increased its exposure by diversifying its sources of funding. It expects to continue expanding and diversifying its investor base.

Rating agencies S&P, Fitch and Moody’s have downgraded Britain, with S&P issuing a warning that Brexit will lead to "less predictable, stable, and effective policy in the UK" and will hurt growth.

This uncertainty generated by a decision to leave the EU is likely to force Britain to focus more on domestic investment.

Investors may be urged, given incentives or forced to prioritise local investment. In the face of a "domestic first" strategy, the biggest losers might be those who depended on Britain’s development support.

When the debate settles, SA may find itself in a good position to negotiate better terms for its trade in agricultural goods and other natural resources, given the importance of these commodities to the UK. Even though these negotiations will be protracted, it is imperative that our government, in the interests of the sector, act fast to improve trade relations with the UK.

SA needs large investments in agriculture for accelerating inclusive growth aimed at mainstreaming small and emerging farmers.

Given Brexit’s constraints, DFIs and state-owned entities are likely to face challenges in raising capital crucial to delivering their mandates.